<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended August 1, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _______________
Commission File Number 0-14365
ALPHA TECHNOLOGIES GROUP, INC.
-------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 76-0079338
- ------------------------------------------------ ------------------------------------
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
</TABLE>
306 Pasadena Ave. South Pasadena, CA 91030
------------------------------------------
(Address of principal executive offices)
(626) 799-9171
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
___ ___
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<S> <C>
Common Stock, $.03 par value 6,948,954
- ---------------------------- ---------
Class Outstanding at August 31, 1999
</TABLE>
<PAGE>
ALPHA TECHNOLOGIES GROUP, INC.
FORM 10-Q
August 1, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I FINANCIAL INFORMATION................................................................... 3
CONSOLIDATED BALANCE SHEETS - OCTOBER 25, 1998 AND AUGUST 1, 1999.............................. 3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE QUARTERS AND NINE MONTHS ENDED
JULY 26, 1998 AND AUGUST 1, 1999............................................................... 4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED JULY 26,
1998 AND AUGUST 1, 1999....................................................................... 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..................................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.. 11
PART II - OTHER INFORMATION.................................................................... 17
</TABLE>
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - OCTOBER 25, 1998 AND AUGUST 1, 1999
(In Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
October 25, August 1,
1998 1999
---------------- ----------------
<S> <C> <C>
(Unaudited)
ASSETS
- ------
CURRENT ASSETS:
Cash $ 1,387 $ 367
Accounts receivable, net 8,671 8,982
Inventories, net 9,546 7,194
Prepaid expenses 623 990
---------------- ----------------
Total current assets 20,227 17,533
PROPERTY AND EQUIPMENT, at cost 21,360 21,807
Less - Accumulated depreciation and amortization 8,005 10,082
---------------- ----------------
Property and equipment, net 13,355 11,725
GOODWILL, net 2,714 2,613
OTHER ASSETS, net 2,379 2,318
---------------- ----------------
TOTAL ASSETS $ 38,675 $ 34,189
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable, trade $ 5,808 $ 3,811
Accrued compensation and related benefits 1,777 1,619
Other accrued liabilities 2,582 1,817
Current portion of long-term debt 961 1,218
---------------- ----------------
Total current liabilities 11,128 8,465
REVOLVING CREDIT FACILITY 8,180 2,187
LONG-TERM DEBT 2,833 4,265
OTHER LONG-TERM LIABILITIES 217 215
STOCKHOLDERS' EQUITY:
Preferred stock, $100 par value; shares authorized 180,000 - -
Common stock, $.03 par value; shares authorized 17,000,000; issued
7,940,838 at October 25, 1998 and 7,957,507 at August 1, 1999 238 238
Additional paid - in capital 43,781 43,868
Retained deficit (23,893) (21,326)
Cumulative translation adjustment, net of income taxes (91) (5)
Treasury stock, at cost (1,008,553 common shares at October 25, 1998 and
August 1, 1999) (3,718) (3,718)
---------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 16,317 19,057
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 38,675 $ 34,189
================ ================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
3
<PAGE>
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE QUARTERS AND NINE MONTHS ENDED
JULY 26, 1998 AND AUGUST 1, 1999
(Unaudited)
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
----------------------------- ------------------------------
July 26 August 1 July 26, August 1,
1998 1999 1998 1999
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
SALES $ 17,823 $16,069 $60,518 $48,544
COST OF SALES 14,237 11,700 48,139 36,118
-------- ------- ------- -------
Gross profit 3,586 4,369 12,379 12,426
OPERATING EXPENSES
Research and development 451 185 1,438 559
Selling, general and administrative 3,241 2,737 9,808 8,525
Other 165 -- 207 --
-------- ------- ------- -------
Total operating expenses 3,857 2,922 11,453 9,084
-------- ------- ------- -------
OPERATING INCOME (LOSS) (271) 1,447 926 3,342
INTEREST AND OTHER INCOME (EXPENSE), net (182) (245) (473) (775)
-------- ------- ------- -------
INCOME (LOSS) BEFORE TAXES (453) 1,202 453 2,567
PROVISION (BENEFIT) FOR INCOME TAXES - - - -
-------- ------- ------- -------
NET INCOME (LOSS) ($453) $ 1,202 $ 453 $ 2,567
======== ======= ======= =======
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
Basic ($0.07) $0.17 $0.07 $0.37
======== ======= ======= =======
Diluted ($0.07) $0.17 $0.07 $0.36
======== ======= ======= =======
SHARES USED IN COMPUTING NET INCOME (LOSS)
PER SHARE
Basic 6,728 6,944 6,707 6,937
======== ======= ======= =======
Diluted 6,728 7,235 6,836 7,062
======== ======= ======= =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
4
<PAGE>
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JULY 26, 1998 AND AUGUST 1, 1999
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
July 26, August 1,
1998 1999
------------------ -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 453 $ 2,567
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 2,338 2,445
(Gain) loss on sale of equipment (70) 11
Stock option compensation expense 22 56
Cumulative translation adjustment 28 11
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 2,358 (311)
(Increase) decrease in inventory (1,362) 2,352
(Increase) decrease in prepaid expenses 230 (367)
(Decrease) in accounts payable (1,337) (1,997)
(Decrease) in accrued compensation and related benefits (58) (158)
(Decrease) in other liabilities (1,525) (767)
-------- --------
Total adjustments 624 1,275
Net cash provided by operating activities 1,077 3,842
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment 88 86
Purchase of property and equipment, net (3,889) (681)
(Increase) decrease in other assets, net (13) 6
-------- --------
Net cash (used in) investing activities (3,814) (589)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 208 31
Proceeds from revolving credit lines 47,549 43,131
Payments on revolving credit lines (44,347) (49,124)
Proceeds from term debt 920 5,836
Payments on term debt (1,301) (4,147)
-------- --------
Net cash provided by (used in) financing activities 3,029 (4,273)
NET INCREASE (DECREASE) IN CASH 292 (1,020)
-------- --------
CASH, beginning of year 1,707 1,387
-------- --------
CASH, end of period $ 1,999 $ 367
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
5
<PAGE>
ALPHA TECHNOLOGIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION
Alpha Technologies Group, Inc. ("Alpha" or the "Company") manufactures
thermal management products, electronic connectors, and custom designed
subsystems.
Thermal management products, principally heat sinks, are primarily
fabricated aluminum extrusions that have high surface area to volume ratios and
are engineered to dissipate unwanted heat generated by electronic components. As
systems become increasingly more powerful and packaging becomes smaller, the
need to dissipate heat becomes more important to the reliability and
functionality of electronic systems. The Company's thermal management products
serve the microprocessor, computer, consumer electronics, telecommunication,
transportation, automotive, industrial controls, factory automation, power
supply, aerospace and defense industries.
Connectors are electro-mechanical devices that permit electronic
subassemblies such as printed circuit boards, power supplies and input-output
wire harnesses/cable assemblies to be coupled and separated. The Company's
connector products include sub-miniature, micro-miniature and ultra-miniature
connectors and cable and/or wire harness connector assemblies, the majority of
which are custom manufactured to meet rigid specifications. The Company's
connector products serve the aerospace, communications, defense, factory
automation, industrial controls, medical electronics, scientific/process
instrumentation and test/measurement industries.
Custom designed subsystems are operational sub-units integrated into major
networks for data transmission, retrieval and transfer. The Company designs,
fabricates and tests custom designed subsystems for the defense industry, the
telecommunications industry and certain commercial markets.
The Company was incorporated as Synercom Technology, Inc., in Texas in
1969, and was reincorporated in Delaware in 1983. In 1993, the Company began its
transformation from a software company to its current businesses. Since October
1993, the Company has grown through a combination of acquisitions and internal
growth. In September of 1994, the Company sold the remaining aspects of its
software and related services business. In April 1995, it changed its name to
Alpha Technologies Group, Inc.
6
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(2) CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of the Company, the accompanying interim unaudited
consolidated financial statements contain all material adjustments, consisting
only of normal recurring adjustments necessary to present fairly the financial
condition, the results of operations and the changes in cash flows of Alpha
Technologies Group, Inc. and Subsidiaries for interim periods. The results for
such interim periods are not necessarily indicative of results for a full year.
All material intercompany transactions and balances have been eliminated.
Certain prior year amounts have been reclassified to conform to fiscal 1999
presentation.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") Number 130 ("SFAS 130")
"Reporting Comprehensive Income"; and in February 1998, FASB issued SFAS 132
"Employers' Disclosures about Pensions and Other Post Retirement Benefits". The
Company has adopted these standards for its fiscal year 1999, however the
adoption of SFAS 130 and SFAS 132 in fiscal 1999 did not have a material effect
on the preparation of and results of the Company's consolidated financial
statements.
Users of financial information produced for interim periods are encouraged
to refer to the footnotes contained in the Annual Report to Stockholders when
reviewing interim financial results.
<TABLE>
<CAPTION>
<S> <C>
(3) INVENTORIES
</TABLE>
<TABLE>
<CAPTION>
Inventories consisted of the following on October 25, August 1,
(in thousands): 1998 1999
-------------- --------------
<S> <C> <C> <C>
Raw materials and components $ 6,187 $ 5,638
Work in process 3,194 2,334
Finished goods 2,564 1,928
-------------- --------------
11,945 9,900
Valuation reserve (2,399) (2,706)
-------------- --------------
$ 9,546 $ 7,194
============== ==============
</TABLE>
7
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(4) DEBT AND REVOLVING CREDIT FACILITIES
Debt and revolving credit facilities consisted of the following on:
<TABLE>
<CAPTION>
October 25, August 1,
1998 1999
----------- ---------
(In Thousands)
<S> <C> <C>
Variable-rate revolving credit facility (effective
interest rates of 8.188% and 8.5% at October 25,
1998), interest payable monthly, principal is
repaid and re-borrowed based on cash
requirements..................................... $ 8,180 $ --
Variable-rate term notes (effective interest rates
of 8.75% to 8.85% at October 25, 1998), payable in
monthly installments ranging from $22,619 to
$37,500, plus accrued interest ................... 2,766 --
Equipment acquisition facility (effective interest
Rate of 8.75% on October 25, 1998, payable in 84
monthly installments of $10,952 , plus accrued
interest............................................ 920 --
Variable-rate revolving credit facility (effective
interest rate of 8.5% on August 1, 1999,
interest payable monthly, principal is
repaid and re-borrowed based on cash
requirements........................................ -- 2,187
Variable-rate term note (effective interest rate
of 8.5% On August 1, 1999), payable in
monthly installments of $90,000 plus
accrued interest.................................... -- 5,130
Other................................................ 108 353
------- -------
11,974 7,670
Less current portion................................. (961) (1,218)
------- -------
$11,013 $ 6,452
======= =======
</TABLE>
Effective April 16, 1999, the Company and its subsidiaries (hereinafter
referred to as "Borrowers") became parties to a loan and security agreement (the
"Agreement") with a commercial lender which provides for revolving loans of up
to $10,500,000, a $5,400,000 term note payable monthly over five years, and an
equipment acquisition facility of up to $1,000,000 for fiscal 1999. An
additional $2,000,000 of equipment loans will be made available to Borrowers if
the Borrower's earnings before provision for income taxes, excluding all
extraordinary and nonrecurring items, equals or exceeds $1.00 for the fiscal
year ending October 31, 1999, or for any fiscal year thereafter. The advances
on the revolving loans are based on the eligible accounts receivable and
inventories and the advances on the equipment acquisition facility may be used
only for the purpose of funding capital equipment purchases by the Borrowers.
The maturity date of the Agreement is April 15, 2004.
8
<PAGE>
On August 1, 1999, $2,187,000 was outstanding on the revolving credit
facility with interest accruing at the prime rate announced by First Union
National Bank plus .5% (8.5% per annum on August 1, 1999). There is an unused
line fee equal to .5% per annum on the difference between $10,500,000 and the
average daily outstanding principal balance of Revolving Loans during each month
payable monthly in arrears on the first day of each month. The $5,400,000 term
note accrues interest at the prime rate announced by First Union National Bank
plus .5% (8.5% per annum on August 1, 1999) and is payable in fifty-nine (59)
equal monthly installments of $90,000 beginning April 30, 1999 and a final
installment equal to all unpaid principal on March 31, 2004, together, in each
instance, with interest thereon to the date of payment. On August 1, 1999,
$5,130,000 was outstanding on the term loan and no borrowings on the equipment
acquisition facility. The obligations under the Agreement are secured by a first
lien on and assignment of all of the assets of the Borrowers which in aggregate
total $34,189,000 on August 1, 1999.
9
<PAGE>
(5) BUSINESS SEGMENT INFORMATION
Summarized financial information by business segment (in thousands):
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
-------------------------------------------- ----------------------------------------
July 26, August 1, July 26, August 1,
1998 1999 1998 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales:
- ----------
Thermal management products $13,226 $12,056 $46,592 $35,652
Connector products 3,127 2,504 9,617 8,272
Subsystems 1,470 1,509 4,309 4,620
------- ------- ------- -------
Total 17,823 16,069 60,518 48,544
======= ======= ======= =======
Operating income (loss):
- ------------------------
Thermal management products (350) 1,460 961 3,619
Connector products 234 243 468 739
Subsystems 126 155 386 349
Corporate (281) (411) (889) (1,365)
------- ------- ------- -------
Total (271) 1,447 926 3,342
======= ======= ======= =======
Interest expense:
- -----------------
Thermal management products 238 205 682 721
Connector products 3 6 9 17
Subsystems 14 15 22 27
Intercompany Elimination -- -- -- (39)
------- ------- ------- -------
Total 255 226 713 726
======= ======= ======= =======
Total assets:
- -------------
Thermal management products 28,701 23,490 28,701 23,490
Connector products 6,731 5,025 6,731 5,025
Subsystems 3,486 3,005 3,486 3,005
Corporate 2,813 2,669 2,813 2,669
Intercompany Elimination -- -- -- --
------- ------- ------- -------
Total 41,731 34,189 41,731 34,189
======= ======= ======= =======
Depreciation and amortization:
- ------------------------------
Thermal management products 660 651 1,856 1,908
Connector products 116 133 351 386
Subsystems 39 45 113 135
Corporate 5 5 18 16
------- ------- ------- -------
Total 820 834 2,338 2,445
======= ======= ======= =======
Capital Expenditures:
- ---------------------
Thermal management products 592 343 3,321 512
Connector products 289 85 482 134
Subsystems 56 -- 86 35
Corporate - - - -
------- ------- ------- -------
Total 937 428 3,889 681
======= ======= ======= =======
</TABLE>
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
- ---------------------
QUARTER TO QUARTER COMPARISON
- -----------------------------
Net Income/Loss. Net income for the third quarter of fiscal 1999 was
$1,202,000 compared to a net loss of $453,000 for the 1998 quarter which
included a $165,000 restructuring charge related to severance payments made at
the Company's connector operations and restructuring expenses related to the
closing of the Company's connector operation in France. This improvement is
primarily the result of improved gross profit and control of operating expenses.
See " Gross Profit, Research and Development and Selling, General and
Administrative Expense" below.
Net income from thermal management operations for the third quarter of
fiscal 1999, before the allocation of Alpha corporate expenses ("corporate
allocation"), was $1,255,000 compared to a net loss of $608,000 for the fiscal
1998 quarter. Results from operations increased primarily due to an increase in
gross profit margin and a decrease in operating expenses.
Net income from the connector products segment, before corporate
allocation, for the third quarter of fiscal 1999 was $215,000 compared to
$308,000 for the 1998 quarter. The 1998 quarter included a $165,000
restructuring charge related to severance payments made at the Company's
connector operations and restructuring expenses related to the closing of the
Company's connector operation in France. The decrease in net income was due to
lower sales volume due to the weakness in the military/aerospace and commercial
aircraft markets.
Net income from the Company's subsystems operation for the third quarter of
fiscal 1999, before corporate allocation, was $142,000 compared to $115,000 for
the third quarter of fiscal 1998.
Sales. Sales for the third quarter of fiscal 1999 decreased 9.8% to
$16,069,000 from $17,823,000 for the same period of fiscal 1998. The 8.8%
decrease in thermal management sales, to $12,056,000 from $13,226,000, primarily
resulted from the Company's decision to no longer pursue certain low margin
sales opportunities. Consequently, the Company is focusing its efforts on
serving thermal management customers who purchase highly customized products,
including products serving the personal computer industry. These customers
typically utilize the Company's expertise in developing solutions to their
thermal management problems.
Connector sales were $2,504,000 during the third quarter of fiscal 1999
compared to $3,127,000 during the prior fiscal year third quarter. Management
believes that the 19.9% decrease during fiscal 1999
11
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was due to the weakness in the military/aerospace and commercial aircraft
markets. Subsystems sales increased to $1,509,000 during the third quarter of
fiscal 1999 from $1,470,000 during the prior fiscal year.
Gross Profit. The Company's overall gross profit as a percentage of total
revenues ("gross profit percentage") for the third quarter of fiscal 1999 was
27.2% compared to 20.1% for the 1998 fiscal quarter. The thermal management
segment's gross profit percentage increased to 26.2% from 16.0% for fiscal 1998
third quarter as a result of the Company's programs to forego lower margin
sales, enhance productivity and lower costs. During the fourth quarter of fiscal
1998, the Company implemented cost reduction measures, primarily a reduction in
workforce, to bring expenses in line with current sales levels. In addition, the
Company has increased its focus on manufacturing efficiencies.
The connector segment's gross profit percentage decreased to 31.0% for the
third quarter of fiscal 1999 from 34.7% for the 1998 quarter. This decrease is
primarily attributable to lower sales volume. The gross profit percentage at the
Company's subsystems operation increased to 28.6% for the third quarter of
fiscal 1999 from 26.1% for the 1998 quarter.
Research and Development Expense. Research and development expenses for
the quarter ended August 1, 1999 were $185,000, or 1.2% of sales, compared to
$451,000, or 2.5% of sales, for the prior year quarter. The reduction in
research and development expenses resulted from the Company's decision to focus
its research and development efforts on solving customers current thermal
management problems rather than the development of next generation solutions.
Because of this change in focus, the Company expects its product research and
development expense to decrease in fiscal 1999 compared with fiscal 1998.
Selling, General and Administrative Expense. Selling, general and
administrative expenses for the quarter ended August 1, 1999 were $2,737,000, or
17.0% of sales. This compares to $3,241,000, or 18.2% of sales, for the prior
year quarter. The $504,000 decrease in SG&A expenses for the third quarter of
1999, compared to the 1998 quarter, is attributable to a reduction in
operating expenses, primarily workforce reductions which occurred during the
fourth quarter of fiscal 1998.
Nine Months to Nine Months Comparison
- -------------------------------------
Net Income/Loss. Net income for the first nine months of fiscal 1999 was
$2,567,000 compared to net income of $453,000 for the first nine months of
fiscal 1998. The fiscal 1998 results included $207,000 related to downsizing
severance payments and restructuring expenses related to closing the Company's
connector operation in France, a $70,000 gain from the sale of equipment and
other income of $122,000. The improvement in net income is primarily the result
of improved gross profit and control of operating expenses. See "Gross Profit,
Research and Development and Selling, General and Administrative Expense" below.
Net income from thermal management operations for the first nine months of
fiscal 1999, before the allocation of Alpha corporate expenses ("corporate
allocation"), was $2,919,000 compared to $267,000 for
12
<PAGE>
the 1998 period. Results from operations improved primarily due to an increase
in gross profit margin and a decrease in operating expenses.
Net income from the connector products segment for the first nine months of
fiscal 1999, before corporate allocation, was $677,000 compared to $662,000 for
the first nine months of fiscal 1998. The 1998 period included a $207,000
restructuring charge related to severance payments and expenses accrued in
connection with the closure of the Company's connector operation in France and a
$70,000 gain related to the sale of certain equipment. The decrease in net
income, without the restructuring charges, was primarily due to lower sales
volume.
Net income from the Company's subsystems operation for the first nine
months of fiscal 1999, before corporate allocation, was $330,000 compared to
$374,000 for the first nine months of fiscal 1998. The decrease in net income is
primarily attributable to an increase in sales and marketing expenses.
Sales. The Company's sales for the first nine months of fiscal 1999
decreased to $48,544,000 from $60,518,000 for the same period of fiscal 1998.
Thermal management sales decreased to $35,652,000 for the first nine months of
fiscal 1999 from $46,592,000 for the first nine months of fiscal 1998. The
decrease in thermal management sales primarily resulted from the Company's
decision to no longer pursue certain low margin sales opportunities.
Consequently, the Company is focusing its efforts on serving thermal management
customers who typically purchase highly customized products, including products
serving the personal computer industry. These customers typically utilize the
Company's expertise in developing solutions to their thermal management
problems.
Connector sales were $8,272,000 during the first nine months of fiscal 1999
compared to $9,617,000 during the prior fiscal year period. Management believes
that the 14.0% decrease during fiscal 1999 was due to the weakness in the
military/aerospace and commercial aircraft markets.. Subsystems sales increased
to $4,620,000 during the first nine months of fiscal 1999 from $4,309,000 during
the prior fiscal year.
Gross Profit. The Company's overall gross profit as a percentage of total
revenues ("gross profit percentage") for the first nine months of fiscal 1999
was 25.6% compared to 20.5% for the 1998 period. The thermal management
segment's gross profit percentage was 24.4% and 18.4% for the first nine months
of fiscal 1999 and 1998, respectively. This increase was due to the effects of
programs to forego lower margin sales, enhance productivity and lower costs.
During the fourth quarter of fiscal 1998, the Company implemented cost reduction
measures, primarily a reduction in workforce, to bring expenses in line with
current sales levels. In addition, the Company has increased its focus on
manufacturing efficiencies. The thermal management segment's 1999 cost of sales
includes $169,000 in severance and moving costs, which had the effect of
reducing the gross profit percentage.
The connector products segment's gross profit percentage increased to 30.5%
for the first nine months of fiscal 1999 from 28.5% for the 1998 period. This
increase is attributable to the reductions in
13
<PAGE>
operating expenses, primarily workforce reductions, which primarily occurred
during the second quarter of fiscal 1998. The gross profit percentage at the
Company's subsystems operation increased to 25.8% for the first nine months of
fiscal 1999 from 24.4% for the 1998 period.
Research and Development Expense. Research and development expenses for
the nine months ended August 1, 1999 were $559,000, or 1.1% of sales, compared
to $1,438,000, or 2.4% of sales, for the prior year period. The reduction in
research and development expenses resulted from the Company's decision to focus
its research and development efforts on solving customers current thermal
management problems rather than the development of next generation solutions.
Because of this change in focus, the Company expects its product research and
development expense to decrease in fiscal 1999 compared with fiscal 1998.
Selling, General and Administrative Expense. Selling, general and
administrative expenses for the nine months ended August 1, 1999 were
$8,525,000, or 17.6% of sales, including $180,000 accrued in the first quarter
of fiscal 1999 for the cancellation of a contractual obligation. This compares
to $9,808,000, or 16.2% of sales for the prior year period. The $1,103,000
(excluding the $180,000 accrual) decrease in SG&A expenses for the first nine
months of fiscal 1999, compared to the same period of 1998, is attributable to a
reduction in operating expenses, primarily workforce reductions which occurred
during the fourth quarter of fiscal 1998. SG&A expenses, as a percentage of
sales, increased due to lower sales volume in the 1999 period as compared to the
prior year.
Restructuring and Other Expenses. During the first nine months of fiscal
1998, the Company recorded a restructuring charge of $207,000 which related to
downsizing severance payments at the Company's connector subsidiary operation in
South Pasadena, California and severance payments and expenses related to
closing the Company's connector operation in France. During July of 1998, the
Company began the consolidation of the connector segment's operation in France
into its operations in the United Kingdom, which was completed in October of
1998.
Interest and Other Income (Net). Interest expense was $726,000 and $713,000
for the first nine months of fiscal 1999 and 1998, respectively. Although the
average borrowing base has decreased, interest expense increased due to an
increase, in the first six months of the year, in the average interest rate paid
on outstanding debt. See "Liquidity" for discussion of refinancing. The Company
recorded other income for the first nine months of 1998 of $192,000 which was
primarily a result of a gain on the sale of equipment by the connector segment's
operation in South Pasadena, CA.
Year 2000 The Company continues to use its existing staff to
comprehensively review existing systems and equipment that need to be updated or
changed as a result of the Year 2000. To date, the Company's staff has
determined that some computer software requires upgrading and has begun the
process of making its systems year 2000 compliant. Based on current estimates,
the cost related to these upgrades is immaterial. The Company's computerized
production equipment is also being systematically evaluated for
14
<PAGE>
compliance. The Company is in contact with its vendors and customers and no
major problem has been discovered to date. The Company is in the process of
preparing a contingency plan and believes all of its systems will be year 2000
compliant before January 1, 2000.
LIQUIDITY AND CAPITAL RESOURCES
On August 1, 1999, the Company had cash of approximately $367,000 compared to
$1,387,000 on October 25, 1998. For the nine months ended August 1, 1999,
$3,842,000 was provided by operating activities primarily from net income and by
a $2,352,000 decrease in inventory. Cash was used reduce debt and to decrease
accounts payable by $1,997,000. Capital equipment purchases of $681,000 were
made to improve manufacturing capabilities and to refurbish and upgrade existing
machinery. For fiscal 1999, management expects capital equipment expenditures to
be approximately $1,000,000, of which $681,000 has been spent through the first
nine months of the fiscal year.
Effective April 16, 1999, the Company and its subsidiaries (hereinafter
referred to as "Borrowers") became parties to a loan and security agreement (the
"Agreement") with a commercial lender which provides for revolving loans of up
to $10,500,000, a $5,400,000 term note payable monthly over five years, and an
equipment acquisition facility of up to $1,000,000 for fiscal 1999. An
additional $2,000,000 of Equipment Loans will be made available to Borrowers if
the Borrower's earnings before provision for income taxes, excluding all
extraordinary and nonrecurring items, equals or exceeds $1.00 for the fiscal
year ending October 31, 1999, or for any fiscal year thereafter. The advances
on the revolving loans are based on the eligible accounts receivable and
inventories and the advances on the equipment acquisition facility may be used
only for the purpose of funding capital equipment purchases by the Borrowers.
The maturity date of the Agreement is April 15, 2004.
On August 1, 1999, $2,187,000 was outstanding on the revolving credit
facility with interest accruing at the prime rate announced by First Union
National Bank plus .5% (8.5% per annum on August 1, 1999). There is an unused
line fee equal to .5% per annum on the difference between $10,500,000 and the
average daily outstanding principal balance of Revolving Loans during each month
payable monthly in arrears on the first day of each month. The $5,400,000 term
note accrues interest at the prime rate announced by First Union National Bank
plus .5% (8.5% per annum on August 1, 1999) and is payable in fifty-nine (59)
equal monthly installments of $90,000 beginning April 30, 1999 and a final
installment equal to all unpaid principal on March 31, 2004, together, in each
instance, with interest thereon to the date of payment. On August 1, 1999,
$5,130,000 was outstanding on the term loan and no borrowings on the equipment
acquisition facility. The obligations under the Agreement are secured by a first
lien on and assignment of all of the assets of the Borrowers which in aggregate
total $34,189,000 on August 1, 1999.
Working capital (which excludes amounts due under the revolving credit
facility) on August 1, 1999 was $9,068,000 compared to $9,099,000 on October 25,
1998. The Company believes that its currently available
15
<PAGE>
cash, anticipated cash flow from operations and availability under credit
facilities is sufficient to fund its operations in the near-term.
FORWARD LEADING STATEMENTS
In conjunction with the provisions of the "Safe Harbor" section of the
Private Securities Litigation Reform Act of 1995, this quarterly report Form
10-Q may contain forward-looking statements pertaining to future anticipated
projected plans, performance and developments, as well as other statements
relating to future operations. All such forward-looking statements are
necessarily only estimates of future results and there can be no assurance that
actual results will not materially differ from expectations. Further information
on potential factors which could affect the Company, including, but not limited
to, the impact of competitive products and pricing, product demand and market
acceptance, new product development, reliance on key strategic alliances,
availability of raw materials, fluctuations in operating results, ability to
retain and attract personnel including management and other risks detailed
herein and in the Company's other filings with the Securities and Exchange
Commission.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During 1997, Aerospace Aluminum Heat Treating, Inc. ("AAHT") instituted an
action in the United States District Court for the Central District of
California against Soco-Lynch Corporation and the Company's Lockhart subsidiary.
AAHT operates a facility neighboring Lockhart's facility in Paramount,
California. The complaint alleges that Lockhart released certain hazardous
chemicals into the ground, and that some of these chemicals have contaminated
the ground and/or groundwater below the AAHT facility and an adjoining property.
The complaint also alleges that Soco-Lynch is a supplier of industrial
chemicals, and that Soco-Lynch spilled certain chemicals at the AAHT facility.
The plaintiff has claimed that its damages are between $200,000 and $750,000. To
date, the Company has incurred $282,000 in the defense of this litigation.
Preliminary investigation indicates that the underground water flows in a
direction that would not support AAHT's claims. In addition, because of the
depth of the groundwater, even if AAHT's claim were supportable, the Company
believes that any release by Lockhart would predate the Company's ownership of
Lockhart. The former owner of Lockhart agreed to indemnify the Company against
such claims, and has been put on notice of AAHT's complaint. Such
indemnification obligations are payable in shares of the Company's common stock,
which are currently held in escrow, and are to be valued at $9 per share.
Some discovery has been concluded and additional discovery may be taken. A
non-binding mediation was held on January 21, 1999. No resolution was reached,
but the parties agreed to further testing and to attempt to negotiate a
settlement thereafter. The testing was conducted and led to results that, in the
opinion of Lockhart's expert consultants, suggest that contamination flowed from
the AAHT property to the Lockhart property, rather than the other way around.
Lockhart had already asserted a counterclaim against AAHT in the referenced
litigation, and is now preparing to press that counterclaim unless the matter
can be resolved amicably. A telephone conference of the parties' respective
experts and counsel, on June 2, 1999, failed to reach agreement, and the parties
are now discussing the possibility of arbitrating the dispute. If the parties
are unable to resolve the litigation through negotiation or arbitration,
additional discovery and a trial may be necessary. The Company cannot evaluate
the likelihood of an unfavorable outcome or estimate the amount or range of
potential loss, if any. Lockhart intends to vigorously defend this action and
prosecute its counterclaim.
On August 5, 1998, an attorney for a group called California Community
Health Advocates wrote a letter to Lockhart Industries alleging that the
Lockhart was in violation of the California Safe Drinking Water Act, California
Health and Safety Code secs. 25249 et seq. (commonly known as Proposition 65)
because of its alleged failure to post certain notices and to provide certain
warnings to neighboring businesses and residents. If all of these allegations
were true, Lockhart could be subjected to penalties of up to $2,500 per day. In
response, Lockhart has offered to undertake efforts to reduce or eliminate its
use of certain chemicals, and to provide appropriate warnings for past and
current usage of such chemicals, as a way of shielding itself from
17
<PAGE>
such claims in the future. The parties are now discussing a possible settlement
of this matter. The prospective plaintiff has demanded a payment of $95,000,
Lockhart has offered significantly less.
Other than as set forth above, there are no material pending legal proceedings
against the Company and, to the Company's knowledge, no such proceedings are
threatened.
18
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
11.1 Statement re Computation of Per Share Earnings for the quarters
and nine months ended July 26, 1998 and August 1, 1999.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
There were no reports for Form 8-K filed by the Company during the quarter
ended August 1, 1999.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Alpha Technologies Group, Inc.
------------------------------
(Registrant)
Date: September 15, 1999 By: /s/ Lawrence Butler
------------------- -----------------------------
Lawrence Butler
Chief Executive Officer
(Principal Executive Officer)
Date: September 15, 1999 By: /s/ Johnny J. Blanchard
__________________ -----------------------------
Johnny J. Blanchard
Chief Financial Officer
(Principal Financial and
Accounting Officer)
20
<PAGE>
EXHIBIT INDEX
Exhibit Page No.
------- --------
11.1 Statement re Computation of Per Share Earnings for
the quarters and nine months ended July 26, 1998
and August 1, 1999.
27.1 Financial Data Schedule
21
<PAGE>
Exhibit 11.1
ALPHA TECHNOLOGIES GROUP, INC., AND SUBSIDIARIES
COMPUTATION OF NET INCOME (LOSS) PER SHARE
FOR THE QUARTERS AND NINE MONTHS ENDED JULY 26, 1998 AND AUGUST 1, 1999
(Unaudited)
(In Thousands, Except per Share Date)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
----------------------------------- ----------------------------------
July 26, August 1, July 26, August 1,
1998 1999 1998 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Shares:
Weighted average common shares outstanding 6,728 6,944 6,707 6,937
Net common shares issuable on exercise of
stock options -- 291 129 125
--------------- --------------- --------------- ---------------
Weighted average common and common equivalent
shares outstanding 6,728 7,235 6,836 7,062
=============== =============== =============== ===============
Net income (loss) ($453) $1,202 $ 453 $2,567
=============== =============== =============== ===============
Basic and diluted net income (loss) per common and
common equivalent share
Basic ($0.07) $ 0.17 $ 0.07 $ 0.37
=============== =============== =============== ===============
Diluted ($0.07) $ 0.17 $ 0.07 $ 0.36
=============== =============== =============== ===============
</TABLE>
1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AUGUST 1, 1999 AND CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
NINE MONTHS ENDED AUGUST 1, 1999 AND JULY 26, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> OCT-31-1999 OCT-25-1998
<PERIOD-START> OCT-26-1998 OCT-27-1997
<PERIOD-END> AUG-01-1999 JUL-26-1998
<CASH> 367 0
<SECURITIES> 0 0
<RECEIVABLES> 8,982 0
<ALLOWANCES> 0 0
<INVENTORY> 7,194 0
<CURRENT-ASSETS> 17,533 0
<PP&E> 21,807 0
<DEPRECIATION> 10,082 0
<TOTAL-ASSETS> 34,189 0
<CURRENT-LIABILITIES> 8,465 0
<BONDS> 0 0
0 0
0 0
<COMMON> 238 0
<OTHER-SE> 18,819 0
<TOTAL-LIABILITY-AND-EQUITY> 34,189 0
<SALES> 48,544 60,518
<TOTAL-REVENUES> 48,544 60,518
<CGS> 36,118 48,139
<TOTAL-COSTS> 36,118 48,139
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 775 473
<INCOME-PRETAX> 2,567 453
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 2,567 453
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,567 453
<EPS-BASIC> 0.37 0.07
<EPS-DILUTED> 0.36 0.07
</TABLE>
